08.03.2022 Finance International Trends

Europe: Green is the new black

Why the war in Ukraine is likely to accelerate Europe’s long-term clean energy transition.

Article by Pinaki Das (photo), Head of Thematic Research, Quintet Private Bank

The war in Ukraine, like any war, is above all a human tragedy. But it could also represent an inflection point in another critical area for humanity: the future of energy and associated fight against climate change. As the war continues, it is becoming clear that the long-term clean energy transition in Europe is likely to accelerate.

When it comes to energy, the market response so far to the invasion of Ukraine has been logical given the immediate need to secure energy during winter. The price of key energy commodities – including oil, natural gas and coal – continues to soar. In Europe, which receives over 20% of its oil and some 40% of its gas from Russia, the impact is especially acute.

In the short term, as sanctions tighten and measures against Russia deepen, EU nations have no choice but to scramble for alternative supply. Germany, the largest European consumer of Russian gas, has halted certification of the Nord Stream 2 gas pipeline that would have carried Russian gas to Germany. In a subsequent move that would have been unthinkable just weeks ago in a nation so profoundly committed to carbon neutrality, Berlin announced that it has put its coal-powered plants on standby and may even let them operate, reversing shutdowns planned as part of its coal exit plan.

“Pragmatism must trump every political commitment,” said German Economy Minister, and Green Party member, Robert Habeck.

As Habeck’s statement illustrates, European leaders will face sustained pressure to address the economic cost of war and the longer-term need to wean the continent off energy from politically volatile regions. In some ways, it’s a case of déjà vu all over again: think back to the 1973 oil embargo, when the oil price rose 300% in less than six months. Vocal calls for “energy independence” followed. But, as we all know, nothing much fundamentally changed.

This time, however, the world has the opportunity to react differently. Five decades after Earth Day was introduced, environmental consciousness has shifted from the fringe to center stage. Again, that is especially true in Europe, where this conflict is close to home and ecological awareness is among the highest in the world. Most importantly, the technology to move away from fossil fuels essentially did not exist in the 1970s. Today, it does across a range of use cases – even if firm policy support and sustained investment are required to reach scale.

For the next few years, building new liquefied natural gas import infrastructure and reviving gas storage can help alleviate some pressure and reduce risks to energy security. Germany has already announced that it will build new LNG terminals, while the EU aims to double gas storage before next winter. The longer-term shifts are likely to be even more impactful.

The EU already has ambitious plans to move towards clean energy, including reaching net zero by 2050. The trajectory of change in the electricity generation mix, for example, is already advancing rapidly. By the end of this decade, the EU could potentially source some 85% of its electricity from zero-carbon resources, compared to below 60% in 2020. But more needs to be done in other areas, including heating, transport and chemicals.

The EU is expected to shortly launch a new energy strategy to wean itself off Russian gas, with a 40% reduction in fossil fuel use by 2030 (equivalent to the amount of gas imported from Russia) and more support for renewables. “A strong European Union cannot be so reliant on an energy supplier that threatens to start a war on our continent,” European Commission President Ursula von der Leyen said in mid-February. “We are doubling down on renewables,” she added.

Backing up that claim, Germany recently announced its ambition to bring forward its 100% renewable power target by 15 years to 2035.

By 2030, in some scenarios, Europe could have materially reduced its reliance on Russia and moved to local clean energy, driven by offshore wind, hydrogen and electric vehicles. Between now and then, transport could be electrified or shifted much more aggressively towards green hydrogen, reducing reliance on imported oil. Heating, a more difficult area to decarbonize, could be transitioned via a mix of electrification and green hydrogen, again powered by local renewables. Technologies such as interconnection, energy storage, smart grids and distributed generation could all further support Europe’s clean energy transition.

Some may dismiss such scenarios as utopian. Others might argue, justifiably, that the world needs to focus its attention on the humanitarian crisis unfolding in Ukraine. Addressing climate change is, however, both feasible and ethical, including in this time of war. Because every euro invested in clean energy can ultimately contribute to greater global stability.

A greener Europe would not only be a stronger Europe, but would also help secure a safer world.

Even if the coal mines in Germany are temporarily reopened, Europe has a unique opportunity to apply the lessons of history. This time can and must be different.